Question

Mark all the true statements about CMOs:

		Tranche stands for “slice” in french
		In a sequential pay CMO, all tranches get their interest payments in the first month except for Z-bonds
		CMO can have several classes (tranches) of securities backed by the same pool of mortgages
		In a sequential pay CMO, the tranche that gets paid last assumes the least default risk
		In a sequential pay CMO, the tranche that gets paid off first is protected against contraction risk

Answer 1

Tranche stands for “slice” in french TRUE

In a sequential pay CMO, all tranches get their interest payments in the first month except for Z-bonds TRUE

  
CMO can have several classes (tranches) of securities backed by the same pool of mortgages TRUE

In a sequential pay CMO, the tranche that gets paid last assumes the least default risk FALSE, it assumes the most default risk because it has the most junior payout order

  
In a sequential pay CMO, the tranche that gets paid off first is protected against contraction risk FALSE, it is protected against extension risk